Why Indonesia is hot and M’sia is not

Our recent Indonesia Corporate Day event has largely answered our question of why Indonesia is hot but Malaysia is not. We believe it boils down to Indonesia’s early stage of development and its huge population.

Although there is little that the Malaysian authorities can do to excite foreign investors, the various 1Malaysia initiatives can help address important social issues, boost economic growth and provide catalysts to the market. Also, Malaysian companies can tap into Indonesia’s exciting opportunities, as some in the banking and plantation sectors have done.

We maintain our overweight on Malaysia and year-end KLCI target of 1,450 points, based on a P/E target of around 15 times. For exposure to Indonesia, our preferred picks are Axiata Group Bhd which owns XL Axiata, Malayan Banking Bhd which controls BII and YTL Power International Bhd which owns Jawa Power.

We attended CIMB’s Indonesia Corporate Day 2010 in Bali on July 29-30 to get a feel of the prospects for the 18 companies there and a sense of why the Indonesian stock market is so popular with investors.

The speakers and the level of energy and excitement pervading the event left us impressed but also with the question of what lesson Malaysia can learn from Indonesia. Why are foreign funds shying away from Malaysia but jumping with both feet into Indonesia?

There is little that the Malaysian authorities can do to get foreign investors excited about the Malaysian stockmarket as the issues plaguing the country are largely structural. Malaysia’s population is a fraction of Indonesia’s and its economy is far more mature.

Nonetheless, the various 1Malaysia initiatives including the Government Transformation Programme, the Economic Transformation Programme and the 10th Malaysia Plan can help address important social issues, boost economic growth and provide catalysts to the market. Execution, however, is of paramount importance. Malaysia risks being overshadowed by its larger neighbour if execution remains poor.
However, there are some aspects of Indonesia’s march forward that Malaysia might want to take a leaf from. We understand that the market’s re-rating in 2009 was triggered by the subtle reversal of capital flight by wealthy Indonesians into the domestic stockmarket, followed in a big way by foreign investors in 2010.

Also, the free float of the market is improving as companies with free float of 40% or higher only pay 20% corporate tax rate instead of the normal 25% rate which was already cut from 30% two years back. Such an incentive could go far in helping boost Malaysian companies’ poor free float.

Investors can tap into Indonesia’s promising prospects via Malaysian companies with exposure there. Malaysian companies have been venturing into Indonesia in a big way in recent years, particularly those in the banking and plantation sectors. Banks with the largest exposure in Indonesia include CIMB Group Holdings Bhd and Maybank.

CIMB owns the fifth largest bank in Indonesia by asset size while Maybank owns the ninth largest. All the large Malaysian plantation companies also have exposure to plantation estates in Indonesia. Sime Darby Bhd’s estates in Indonesia are among the largest while Genting Plantations Bhd, KL Kepong Bhd and IOI Corporation Bhd have significant exposure as well. In the telecommunication space, Axiata owns XL Axiata while in the power sector, YTL Power owns Jawa Power.

Affin Holdings Bhd does not have any exposure to Indonesia now but will when it completes its acquisition of Indonesia’s Bank Ina Perdana in January 2011. The group plans to turn the bank into a full-fledged Islamic bank as it sees even better prospects for this market segment. In Indonesia, there are only five to six Islamic banks servicing a Muslim population of more than 200 million.

Although the contributions will be small at below 2% of group revenue in the next one to two years, we anticipate exponential growth in the next three to five years given the under-penetrated market. Indonesian banks are enjoying strong loan growth of 18%-20% and attractive net interest margins of 6%+. M&A is one of the key catalysts behind our outperform recommendation for the stock.

AirAsia Bhd has 49% ownership of Indonesia AirAsia (IAA), an associate which operates low-cost aviation services in Indonesia. As the losses from IAA have long wiped out AirAsia’s initial investment in the airline, AirAsia no longer equity accounts the performance of IAA.

However, AirAsia operates many flights to/from Indonesian cities which contribute an important chunk of its passenger numbers. We have an outperform recommendation on AirAsia with a target price of RM1.90.

Axiata Group Bhd — XL Axiata, the second largest and fastest-growing mobile operator in Indonesia, contributes an estimated 22% of Axiata’s FY10 core net profit and 24% of its FY11 core net profit. It accounts for 19% of our SOP target price of RM4.95.

XL’s innovative management has enabled the telco to gain substantial market share in a fast-growing market, fuelled by a robust economy and rapid adoption of mobile data. We project an FY10-13 EPS CAGR of 70% for Axiata, driven by 15% revenue CAGR, improving margins, flattening depreciation and falling interest expense. Axiata remains an outperform.

Genting Plantations Bhd owns 17,669ha of planted oil palm estates in Indonesia or 23% of the group’s total planted oil palm area. However, the Indonesian estates are mostly immature, leading to a loss of RM6 million for these estates in FY09. We expect this division to be a significant contributor in 2013 when the first batch of plantings closes in on its prime age profile.

In the meantime, the earnings of the group will be dependent on crude palm oil price movement and Malaysian operations. We continue to rate the stock a neutral.

IOI Corporation Bhd has the smallest Indonesia exposure among the big-cap planters due to its cautious view on the operational environment in Indonesia. In FY09, only 1% of its total planted oil palm estates were located in Indonesia. The group also has exposure to estates in Indonesia through its stakes in associated companies. However, earnings contribution from Indonesia is small at this juncture.

Due to its less aggressive expansion plan for Indonesia, the group’s fresh fruit bunch output growth prospects are not as compelling as its peers. This, coupled with its rich valuations, underpins our underperform rating.

KL Kepong Bhd was the first among the three big cap planters to expand into oil palm plantations in Indonesia. Its consistent planting of new acreage in Indonesia over the past decade has turned it into the second largest listed Malaysian planter in Indonesia, after Sime Darby, in terms of acreage. Forty-five percent of its total planted area is located in Indonesia and we estimate that Indonesia plantations made up around 35% of its total plantation earnings in FY09.

We view the Indonesian estates as a key driver of the group’s future earnings given the limited scope for expansion in Malaysia. There is no change to our neutral call on KL Kepong as we believe the strong growth prospects of its Indonesian plantations are priced into the stock.

Malayan Banking Bhd — Among the Malaysian banks under our coverage, Maybank has the highest contributions from Indonesia via its 97.5% stake in Bank Internasional Indonesia (BII), the ninth largest bank in Indonesia. Its Indonesian operations account for about 7%+ for the group’s net earnings and total loans and this proportion is set to increase to 8%-9% in the next two years.

BII’s established operations with a wide branch network of more than 100 branches will enable it to benefit from the swift loan growth of 18%-20% in Indonesia. Furthermore, BII has a net interest margin of about 6%, way above the circa 2.3% for Maybank’s domestic operations.

We are projecting a strong FY09-12 CAGR of 57.1% for BII’s net profit. We are also going for 16.4% CAGR for its loan base, almost double our projected loan CAGR of 8.4% for the group. The strong growth of its Indonesian operations underpins our outperform call on Maybank.

Sime Darby Bhd owns one of the largest planted oil palm estates in Indonesia by acreage. Its 204,237ha of oil palm estates in Indonesia form around 38% of its total planted area. The bulk of the Indonesian estates came from Kumpulan Guthrie which bought these estates from the Salim group during the Asian financial crisis. It took a while for the group to rehabilitate the estates and improve the infrastructure surrounding the estates.

Sime is now confident that the yield from the Indonesia estates, which is lagging behind its Malaysian estates, will start to improve over the next few years and will be a key source of growth for the group. Despite this positive, we maintain our neutral call on the group due to concerns over potential provision in its upcoming 4Q results

Unisem (M) Bhd’s acquisition of AIT in 2007 gave it a foothold in Indonesia. The exact contribution to Unisem’s financials is not revealed but we estimate that Indonesia contributes approximately 25%-30% of group sales and a smaller 10%-20% of group earnings. The strategy for Unisem in Indonesia is to establish an auto hub as the volume of the auto business is growing.

We maintain our outperform call on Unisem on the back of the potential re-rating catalysts of a quarterly improvement in earnings, stronger economic recovery and a revival in consumer and corporate spending.

YTL Power International Bhd’s exposure in Indonesia is via its 35% stake in PT Jawa Power. Jawa Power owns a 1,220MW coal-fired power station in Paiton Complex in east Java and supplies power to the national utility under a 30-year PPA. The plant, comprising two generation units of 610MW each, is the second largest operational IPP in Indonesia.

In FY09, PT Jawa contributed about 17% to YTL Power’s pretax profit. This unit has been a steady contributor to the group’s overall earnings, thanks to the backing of the PPA and prompt payment. YTL Power remains an outperform in our books and our top pick in the power sector for i) its multi-utility focus, ii) its still-sizeable cash hoard of RM6.6 billion, and iii) possibly higher dividends.

Potential share price triggers are i) stronger-than-expected PowerSeraya numbers, ii) more clarity on its WiMAX venture and iii) potential M&As and/or higher yields from its sizeable cash hoard. Our end-CY10 sum of parts-based target price remains intact at RM2.65.





- by CIMB Research